Tag Archives: three sector balance

What is People’s Quantitative Easing?

PQE,  sometimes known as Overt Monetary Financing, is the process of creating new money, issued by the central bank in exchange for government bonds. This is then directly spent into the economy to stimulate economic activity. Whereas conventional Quantitative Easing is primarily to provide liquidity to banks and other financial institutions – Some might say it is to give them money which can create asset price bubbles, and other price distortions! – PQE is much simpler and free of many complications.  PQE  can be part of powerful fiscal policy to remedy the  problems of recession and depression.

Mention PQE, however, a term coined I believe by Richard Murphy, and it won’t be long before Zimbabwe and the Weimar Republic will be used as examples of why it’s not a good idea! That’s OTT, but nevertheless the objection of possible inflation needs to be addressed.

PQE could possibly cause inflation. All government spending, as with all spending, deficit or otherwise, carries an inflationary potential .

Deficit spending is necessary to keep the economy functioning when users of the currency wish to save some of it. Those who doubt that might just like to consider the very simple economy of a baby sitting circle. If everyone in the circle readily spent a token and received a night’s baby sitting in equal measure to their willingness to do a night’s baby sitting to receive a token, there’d be no problem at all. But, say, for whatever reason, some of the sitters decided to accumulate tokens. Fairly quickly there would be a shortage and the system would cease to function. There would be a demand, from those without tokens, that the baby sitting council should issue extra ones. Those with a stockpile of tokens would object, saying the “printing” of new tokens would devalue their existing tokens.

If the hoarders lent the tokens back to the council they could be pacified with some reward. Just as lenders of pounds to the government are pacified with a reward of extra pounds. But if the hoarders of the tokens saved them in a piggy bank and refused to lend them back, all the council could do would be to create new tokens and inject them into the system. This would be the equivalent of PQE.

Is one method more or less inflationary than the other? There’s not much in it. Arguably PQE would be less inflationary because there are no extra rewards needed. If the issuing of new tokens, by either method, was just enough to restart the system, not too much and not too little, then neither method would be inflationary.

So who are the hoarders in the real economy? The central banks of the big exporters are the biggest. The big exporters don’t want to spend all they earn by selling goods and services into the British economy. So they buy Government bonds and so effectively lend back their surplus tokens, or ££. The wealthy are the other main ‘culprits’. They tend to accumulate more ££ than they need.

But what if not everyone recycled their extra tokens back through the banking system? Suppose they kept hoards of cash in safes or bank deposit boxes? The government can’t borrow those back. All it can do is create some new tokens. PQE in other words.

The government can’t know just how fast money is moving or if lots of it is being stored this way. What it can expect is the combination of low interest rates and low inflation will make it more attractive for many users of currency who may be engaging in illegal, or borderline, transactions and so wish to hide their finances, will  to store their cash this way.  However, Government can easily monitor inflation. If it is engaging in PQE and inflation starts to be a problem it needs to back off. Alternatively if it’s not a problem it can do a bit more. The government needs to be careful, but shouldn’t be so scared of the idea that it doesn’t even try it out.

Neo-Liberalism virus infects the UK Labour party! They want a government surplus without a trade surplus!

I suppose it may be naive of me but I’d always expect more intelligent economic thinking from the British Labour party than their Tory counterparts. But there seems to be a neo-liberal virus on the loose which attacks those parts of the human brain which are responsible for rational thought.It has started to attack politicians like Ed Balls who’ve decided they want a government surplus.

Now we have this on Labourlist!


I submitted the following comment:

“Economic competence is vital for Labour in 2015”

Ok yes you’ve got that bit right.

But have you thought through what a promise of a budget surplus means? If you look at the countries who do run budget surpluses Norway, Germany, China etc then what else do they do?

Has anyone noticed that they also run trade surpluses? And that’s not a coincidence. It means that those countries have money coming into their economies from sales of net exports. It means that the Governments of those countries have to tax those receipts away to prevent high inflation. It means that there is still enough spare cash in the economy to enable the private sector to save.

If you try to run a budget surplus, which sucks money out of the economy, and at the same time run a current account trade deficit , which sucks money out of the economy, all you’ll achieve is an economic crash!

So please, British Labour Party learn some basic economics! Don’t talk about the budget deficit in isolation. If you want a budget surplus start thinking about how you are going to achieve a trade surplus!

If you agree, you might want to click on the up arrow to show approval and/or make your own comment. You might want to say that a trade surplus isn’t necessarily a good idea either.

Three Sector Balances Haven’t Gone Unnoticed by the Economic Mainstream

MMT incorporates the concept and emphasises the importance of the sector financial balances model of aggregate demand. It is a simple concept. The public sector, the private sector and foreign sector surpluses/deficits net to zero in any measured time period.

It causes neo-liberal types some problems. They probably do not like the idea of a public sector deficit being a necessary condition for a private sector surplus. They would like to pretend that the public account and private sector can be in strong surplus simultaneously. That’s impossible except for those countries who export much more than they import. So I wouldn’t expect to see three sector graphs offered up for public consumption by the mainstream media any time soon.

They are pretty good indicators of how the share market might perform though so naturally they can’t be totally ignored!


For what it’s worth I would agree that its a good time to buy shares. Watch that black line (the private sector) in the first graph. When it bottoms out, it will be a good time to sell!

If previous experience is anything to go by, the indicators will be completely misinterpreted for popular consumption. The reduced future public sector deficit will be hailed as a great success by various western  governments.  There won’t be any mention that this will mean the private sector will be overstretched. There won’t be any warnings of the next slump to come. The experts will be telling investors not to panic and prophesising soft landings etc.  You’ll know what I mean. You’ve heard it all before!

PS If anyone does really well from this advice I’m not too proud to accept tokens of appreciation!

A Simple Four Sector Model of an Economy

MMT incorporates sector models, which date back to Keynes and play a role in neo- and post-Keynesianism, of the economy which gives, IMO, a key insight into the way a typical sovereign economy may function. The  model usually used is one of a three-sector model, government, the private sector and a foreign sector as ‘rest of world’.

There is an aggregation of individual accounts into overall national accounts. According to the principles of double-entry bookkeeping, all financial assets are another’s financial liabilities. All accounts together – private, public, foreign – sum to be  zero. In a three sector model at least one of the three has run a net surplus, while at least one of the other two has to run a deficit.

In principle the division can be of any number from two upwards. This model divides the private sector into the active economy where the money supplied to it changes hands at least once in the course of an arbitrary time period, say a month, and stored private money where money doesn’t change hands, or  if it does, moves from one account to another in a way that does not affect the active economy.

The active economy is where people earn their living, by selling their labour power, and buy  commodities which are the necessities of life. It is the one that matters to most people but  of course does not exist in isolation.
Stored private money would normally be tied up in savings accounts, long term investments such as government bonds, but equally it could be stored as cash under a proverbial mattress or even in a child’s piggy bank. Active money is the sort normally held in our current, or checking, accounts, and in our purses and wallets.

economy2The model shows that Government Spending, Withdrawals and Loans and Exports payments all will add currency units CUs to the active economy and can be considered inflationary

Taxation, Savings, and Import payments will remove money and can be considered to be deflationary.

For illustrative purposes only, the left side table show CU levels at time period t. The right side table shows CU movements.
Starting at time t=0 we can assume zero levels. Further we assume a’ready to go’ economy.
At time t=1 we can conceptualise the ‘kick-starting’ of the economy by a government expenditure of 13 CUs. Simultaneously taxation (3 CUs) is required to establish the value of these CUs. This leaves 10 CUs of fast moving money in the active economy. 10 CUs is the set target.
At time t=2 Government spends an extra 6 CUs, taxes 3 CUs. The private sector saves 2 CUs. There are 1 Cus of exports and 2 Cus of imports.
The position  is still 10 CUs of active money in the economy.
At t=3 Government spends 5 CUs and taxes at 3 CUs. Savings andwithdrawals are both 1 CUs. Exports are 2 and Imports are 3,
This leaves 11 CU’s in the economy. One higher than the target. This can be corrected later or left as is of course.

There are several important things to note from this simple model:

  • Government has a strong influence on the workings of an economy but it is not in total control. Except in special times  like wartime, it would not be able or willing to sufficiently control the savings and desire for loans of the private sector.
  • As stores of money are built up by the private  and overseas sectors,  so too does the level of Government debt. One is the inverse of the other.
  • Wealthier  members of the private sector, and the thrifty members too,  contribute more to Government debt than the less wealthy and less thrifty .
  • Running a continuous trade deficit  increases levels of government debt and/or reduces the stored money of the private sector.
  • Government debt is necessary to create private wealth.

Implications for Real economies
1) The USA

The USA has a total government debt of around $17 trillion.

Of this ~$5 trillion was owned by the overseas sector. ~$5 trillion is owned by intragovernmental organisations ~$7 trillion by the US private sector.

The argument is often made in MMT circles that no matter  what the size of any government deficit, or debt, the government can never involuntarily default. It is the ‘government checks never bounce’ argument’ which is now  well established.

But, if the US doesn’t have a debts problem, could it have an assets problem? Could the size of assets (stored money)  held by the private and overseas sectors ever become so large they threaten to destabilise the US economy? The owners of these assets are could well consider that what we argue are necessary fiscal measures to reduce unemployment levels,  to be highly inflationary. They may well be wrong in thinking that, but is it possible they could bring about that inflation by spending wildly, on anything and everything,  outside of government control, before the $ lost too much of its purchasing power?

A little extra inflation would probably be a good thing but could it get out of hand?

To be continued.